Coronavirus and the Bottom Line - Stay In or Get Out (of the Market)
Containment and Growth
Remember Stephen Covey’s 7 Habits of Highly Effective People and his breakthrough Circles of Control, Influence and Concern? Many people are concerned about the coronavirus and its impact to their health and financial wellness. Whether the virus has the potential to create an economic recession is beyond most of our control. We do have some influence on whether we contract or further distribute the disease and we actually have some control over its financial impact on us.
Our thoughts and prayers to all the people directly impacted by the disease and/or its effect on their livelihood. This is a scary time, more for some than others, and wish the best for you all.
First the Virus
The tips for avoidance are to wash your hands excessively and wear a mask. Not a cursory rinsing, but thoroughly washing your entire hand and fingertips as if you grabbed a pile of dog crap. The virus gets into your lungs, so don’t put the disease in your mouth or nose. Live healthy. Maybe fear of contracting the virus will push people off the fence to quit smoking or reduce drinking.
The long standing measure of a firm handshake may be a thing of the past.
I try to stay healthy by avoiding sugar and inflammation, drink lots of water, eat delicious veggies, and exercise.
Pay attention to your medication’s side effects such as weakening your immune system. We sometimes gloss over the speed talker drug company warnings on the TV commercials. Check with your doctor.
Sometimes it’s Best to Hold
It can seem quite odd, even foolish to watch markets (stocks/equities/S&P Index...) fall, see big declines in the 401k and do nothing to counter it. I completely understand the desire to respond, and being human, I’m also tempted. But many times doing nothing is precisely the most intelligent approach.
There is greater long term risk to portfolio growth by stepping out of the market than staying in it. I remember back during the 08’ Financial Crisis a retiree asked me about the market, saying his financial advisor just suggested to sell everything and go to cash. I cringed. Sure enough, a week later on March 9th 2009, the market staged a tremendous recovery and began its surge to new highs.
When you review an investment’s annual return, whatever it might have been; 8%, 12%, 25%... it’s easy to assume that return came methodically throughout the year. So, for example, if you earned 12% that year it was as if you earned 1% per month. That’s not reality. Oftentimes the bulk of a market’s annual return comes from some exceptional days. In fact, I’ve seen people invest money differed by only a week and finish the year with dramatically diverse experiences.
Short term timing can become a disastrous approach that reduces your overall return and increases your overall risk.
Besides the fact that there are so many unknowns about the coronavirus, there are a couple of things that make timing coronavirus volatility especially risky. First - the underlying economy was strong going into it and could be again coming out.
And there’s an even bigger unknown component. Second – world governments and central bank’s stimulus intervention. They preemptively responded and have said they’d do much more to bolster global growth. Even as the virus causes further economic damage, would an aggressive response, like what Ben Bernanke began in 2008/2009, decisively turn markets around? And, would you be like the retiree above, who got the full brunt of the loss and missed the majority of the recovery?
Control - Protect Your Income, Grow Your Base
Here’s how I reduce portfolio market risk for distribution needs (monthly income to retirees for example) - keep 5 to 10 years of expected distribution assets out of the market. Simple. If you need to liquidate 100k within the coming 5 years, don’t put that 100k in the market. Instead use bonds or other fixed type assets.
The equities in your portfolio are to provide a source of future income, despite knowing full well that somedays won’t be pretty. But history has shown that equities will recover from short term challenges.
What if you hadn’t adhered to that advice and you have money in the market that you need for shorter term needs? The market was fantastic in 2019 and strong in January. It’s likely you would only have a small loss in 2020 but still plenty of gain over the past 15 months. So maybe you didn’t rebalance at the top, but I wouldn’t hesitate to rebalance now to a more conservative portfolio to cover distribution needs if that’s what you need.
What if You Want to be Opportunistic During Risky Times?
Anyone watch The Big Short? It’s true, some people made a ton of money betting on the demise during the financial crisis. Companies will benefit from the virus, and some will fail. When you think of a suffering company, cruise ships probably come to mind. As I write this article today, March 9th 2020 just before market close – Royal Caribbean Cruise Ltd. is down about 24% (over 50% for the month). Whoever shorted that stock is having a great day.
Shorting a stock is a way to benefit from a stocks falling price. The problem with shorting individual stocks is it can have unlimited risk. Shorting a stock means you don’t own it, but agree to buy the shares at a future price. Being long in a stock means that you own the stock outright and believe it will be worth more in the future.
There are ETF’s such as VXX (tracks Volatility Index) and other more aggressive ones that short markets in multiples. Investing to benefit from negativity is a strategy that could work during sustained periods of decline. But they massively deteriorate in value during a market recovery.
Or, rather than looking to profit from a falling market, you might be considering investing in companies that could benefit from this – like Zoom Meetings & Chat (ZM). The move to video chat and conferencing has accelerated because of the virus.
The risk in opportunistically identifying specific companies is that their price could already be overvalued, and even though the company does well, the stock might not outperform the market by the end of the recovery.
Shorting the market means you are betting against people. Something I don’t like to do. So I encourage you to look opportunistically, just be aware of what price you are buying into. Rather than concentrate a large investment into one company, look for investments that historically invest into groups of innovative companies.
Containment (of the disease) and Growth (of the economy)
There was a saying repeated frequently during the recovery phase of the 2008 Financial Crisis – don’t fight the fed. It rang true.
There are two things every government in every continent, country, state, territory, and city is focused on. Containment and Growth. Beyond just the governments, every company and even down to each individual wants to avoid the virus and not be harmed economically.
What does that mean? In the short term we will suffer economically during the containment. Simultaneously there will likely be a massive worldwide stimulus effort to stave a recession and grow economies. I’m not going to fight that.
If you own stocks for long term needs, and don’t invest into stocks for short term needs, then you are probably in good shape to ride this through. In fact, if you are pre-retired and still investing for your future, you might see this as a great buying opportunity. Eventually the market will be worth more than it is today.
Don’t sell equities to take care of short/mid-term needs. Virus or not, the market is too unreliable for that.
If you have short term needs but have your money in the market, it’s still a good time to sell from the market and invest more conservatively.
I prefer to invest with people (buy long) rather than bet against them (sell short). Productivity wins most of the time.
Governments don’t bail out short sellers, they bail out the economy.
Remember the old adage – buy cheap and sell high. Stocks could get cheaper yet, but they are cheaper than they were last Christmas. It might be a good time to stuff your stocking.
If you want to be more conservative or even attempt to benefit from a possible further market decline, please call us. There are ways to do that. Although we recommend most people invest for the long haul.
Here’s a No-Brainer
Check your mortgage rates. The volatility has caused extreme movement in the 10 year bond, which is generally correlated to mortgage rates. They recently dropped to levels not seen in years. If things continue to worsen it’s possible they go lower, but I wouldn’t overthink it. Anyone that didn’t secure their mortgage at the bottom of the market years ago – this is your do-over.